Cashing in on the rally

FUND manager Carl Stick fears the rally in FTSE 100, which has rebounded nearly 40% since the low last March, may have gone too far.

However, the talented stock-picker hopes to maintain healthy returns on his strong-performing Rathbone Income fund by hunting out stocks that pay high dividend yields.

He also fears problems ahead for mortgage lenders, amid the slowdown in the property market, and has dumped his shares in Alliance & Leicester. He is now banking on lenders focused on the corporate market, such as Barclays.

While Stick remains confident the wider recovery will continue, he is concerned about some of the stock market‘s largest 'growth' stocks. 'Our view of UK and global markets remains reasonably optimistic, despite the prospects of increases in interest rates through 2004,' he says. 'We believe that this will be less extreme than some people are forecasting.

'However, we are more nervous about valuations within the FTSE 100 - growth rates in many cases do not justify ratings. Therefore, our large-cap exposure will remain limited to businesses that supply higher than average yield such as within the utilities and tobacco sectors, and in specific companies that do offer growth opportunities.'

For that reason, Stick has stocked up on Barclays and Tomkins, an engineering firm whose products include car seatbelts, baths, taps and windows and which currently pays annual income of more than 4%.

Other favourites include drinks giant Diageo and building matertials group Hanson. Among smaller stocks in the fund, he has added a spicier growth element by backing logistics companies TDG and Wincanton, which both yield more than 5%, and recovering media stock Captial Radio. He has also created a holding in Northgate, a northern-based company involved in the leasing of vans – a 'specific play on the upturn of the UK economy'.

The Rathbone Income fund has had an impressive run since Stick took over in January 2000, rising 51% compared to a 1.5% rise for the average UK equity income fund and a 17% fall for the FTSE All-Share, according to fund analyst Micropal.

Stick has also run the top-performing Rathbone Special Situations fund for two years and co-manages the Rathbone Smaller Companies fund with Marina Bond.

Both funds are gambling on the on-going recovery in technology and media stocks. The Smaller Companies trust recently increased its stake in Tikit, an IT consultant to the legal industry, following a positive AGM statement. It also topped up holdings in Aim-listed software company Codascisys and marketing firm Media Square. It also bought into Scottish Radio Holdings after Emap took a stake at a significant premium to the current price. 'It confirmed our view that the company has some high quality assets and that consolidation in the radio industry is probably not far away,' said co-manager Bond.

Like Stick, she also took a new stake in Capital Radio after 'some encouraging industry figures', and also bought into publishing company Incisive Media.

The fund has sold its stake in car dealer CD Bramall, after a bid from rival Pendragon pushed up the price, and its holding in technology minnow Eurodis Electron.

The Special Situations fund has also benefited from the rebound in tech and media stocks. The fund has taken a new holding in BATM Advanced Communications. 'It's a business that specialises in providing 'switch' equipment for voice-over-internet-protocol (VOIP) - technology that will dominate telephony for many years, as it ultimately provides cheap phone calls over the internet.'

Patsystems, which supplies financial information systems to the derivatives industry, is another key play. 'We look for companies that can give us leverage into an economic upturn,' says Stick. 'Hence, our increased exposure to certain technology issues.'

The £232m Income fund, the £48m Special Situations fund and the £39m Smaller Companies funds all charge a higher than average 5.5% up front followed by 1.5% a year. Invetors who do not need financial advice can reduce initial charges by investing through a fund supermarket or discount broker.

Stick is a top-rated fund manager. His Income fund was the fourth highest selling equity fund in December with fund supermarket Fidelity's FundsNetwork. Special Situations was the fifth best seller in its category.

The Income fund was recently praised in the White List, a premier league of income funds published by adviser Principal Investment. 'The performance of this fund, through one of the most challenging markets we can recall, has proven the doubters wrong. We think his distinctive and eclectic process sets (Carl Stick) apart and we recommend investors buy this fund,' the report said.

However, investors should remember strong past performance is no guarantee of future returns and that the Smaller Companies and Special Situations funds carry higher risks than the Income fund. Adviser Bestinvest says the latter 'should only be considered as a fund held in addition to core holdings in portfolios'.

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FundWatch is written by Andrew Oxlade